Running Low On Gas: The Competition For Ethanol Feedstocks

The global ethanol market has grown 400% in the last decade, driven by the United States and Brazil.

Rapid adoption of Flex Fuel Vehicles (FFVs) capable of using any mix of gasoline and ethanol has supported demand in Brazil.
The mandated Renewable Fuel Standards (RFS) has similarly supported ethanol consumption in the United States.
This summer’s drought conditions in the US have pushed up the price of corn, the primary feedstock for
US ethanol production.

Brazil: arbitrage at the pump

Flex Fuel Vehicles (FFVs), introduced to the Brazilian market in 2003, account for 85% of vehicle purchases and 50% of the
total national fleet today

FFVs drove a rise in consumption of
hydrous
ethanol from 5bn to 17bn litres a year over the period 2003 to 2010. This has since fallen to 12bn litres

Furthermore, Brazilian government efforts to control inflation and gasoline prices have politicized the fuel balance and
have limited ethanol prices

The 12/13 season is expected to deliver increased production and the global sugar market is returning to surplus, suggesting
more cane is available for ethanol production

However, domestic ethanol values remain at a 20% discount to sugar returns, partly because of the weak Real

Weather Stress in the US

The Renewable Fuel Standards (RFS) have driven consumption of ethanol in the US. The first RFS was introduced in 2005 and
mandated the use of 7.5bn gallons of ethanol in gasoline by 2012. However, this was met early and a second
RFS was subsequently introduced, increasing the mandates, and demand was required to reach 9bn gallons
in 2008, increasing to 36bn gallons in 2022

In 2012, around 13bn gallons of ethanol is set to be blended with gasoline, the majority of which is derived from corn –
enough to amount to around 10% of US gasoline supply

A lack of rainfall and unrelenting heat during the mid-summer silking period has damaged the outlook for the 12/13 corn crop,
and will also see larger-than-usual acreage being abandoned, whilst yield forecasts have been continually
downgraded

The US drought has pushed up corn prices, reaching $8 per bushel for delivery on the Sept. ’13 contract

These record prices are unsurprisingly causing concern from the demand side of the market and the livestock, poultry and
hog industries are calling for the RFS to be waived, though there is no precedent for this and it is
also unlikely to impact demand given currently blending economics

In theory, ethanol supplies from Brazil could be used to meet US demand, though that still depends upon the price differential
between corn and sugar achieving an equilibrium level that is able to encourage a change in trade in
the medium term

Henry Toller, Czarnikow analyst, said: “Demand for ethanol for blending into fuel has increased massively over the last decade.
With the current pressures on supply being felt in the US, it has exposed an interesting change in trade
dynamics.”

Peter de Klerk, Czarnikow analyst, said: “The increase in the Brazilian sugar crop in the current season, and a return in
the international market to a surplus could see more cane turned to ethanol. Still, the 20% discount between
ethanol values and sugar returns remains an important market factor.”

Want more information?

If you are interested in receiving more in-depth information on the sugar and ethanol markets, subscribe to our Market
Advisory services.

Users of our Analysis Live service can now access
information at czapp.com.
For users of Analysis Live, look out for a registration e-mail for our new portal,
or new users can register via the site itself.